Charts are a very important tool, they are like the crystal ball of today’s business. We finally get to see data, not just read numbers and see if they sound good or bad, now we have a picture to keep in mind and to help us better comprehend and digest our data.
However, a Forex chart has gone through so many changes, but one thing is guaranteed, it gets only better and better. Let’s see before introducing the candlestick charts and the various candlestick patterns, some of the other types of a Forex chart.
Forex Line Charts
A line chart is simply produced by connecting the closing prices of trading days (or hours or minutes, depending on the time frame you choose). It gives us a good idea of where the market has been going… up or down. But it doesn’t show us much more information other than that. Here is a Forex line chart sample, it represents the USD/JPY pair for about 3 months. Notice that you can easily see that the market is going down.
Forex Bar Charts
Just like line charts, bar charts show us the direction of the market. But more than that, they also show us the closing price of each session and how much money was involved in that specific session. Here is a bar chart sample, it represents the same line chart we saw just right above this, but this one in bars instead of a line.
Forex Candlestick Charts
Just like the two previous types of Forex charts, candlestick charts show us the direction of the trend (the market) and the closing price of each session. But candlestick charts show us much more information than just that.
They show us the open, high, low and close prices, using shapes called candlesticks which can help us better read the chart and even to predict what is most likely to happen in the future.
Here is a candlestick chart that represents the same market and time frame that the previous two charts did.
Because the candlestick charts provide more information than the other two types of charts, more and more (more means tens of millions) of traders prefer using them. And as you know, human mind always complicates things, people have found hundreds of ways to analyze the market using candlestick charts.
Some of these ways are Candlestick Patterns. Traders have noticed that when the candlesticks form a certain shape, market tends to act in a certain way, these shapes have long been known as candlestick patterns.
Now that we know how candlestick charts look and what they are used for, let’s take a look at the candlesticks themselves and see how they form and what that formation means.
A candlestick shape simply illustrates the space between the opening price and the closing price. Think of it as a railroad which is the distance or space between two train stations that the train moves on. Same here with a candlestick.
A candlestick is either red or blue/green.
A blue candlestick starts at a certain point then moves up till it reaches another point where it closes. So in this kind of candlesticks, the closing price is HIGHER than the open price.
Notice that in this candlestick you should be buying, hence it is sometimes called a bullish candlestick, the reason is that the price is going UP.
A red candlestick starts at a certain point then moves down, so the closing price is LOWER than the open price.
This candlestick is known as a bearish candlestick. The reason is that the price is going DOWN.
In both red and blue candlesticks, we notice that they often have a thinner line going above and below the candlestick bodies. These lines are called “wicks” or “shadow” and sometimes “tails”.
These shadows represent the track that price took while moving up and down, regardless of what the open and closing price are.